Micro, small, and medium-sized businesses (MSMEs) and startups are the engines of economic growth, employment, and innovation in India's rapidly changing business environment.

Micro, small, and medium-sized businesses (MSMEs) and startups are the engines of economic growth, employment, and innovation in India's rapidly changing business environment. Even if their journey is thrilling, these businesses must comply with a complex web of regulations, with Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) being particularly important areas. TDS and TCS compliance is challenging for startups and MSMEs since they frequently lack the resources to handle these intricacies.

In contrast, major firms usually have in-house tax teams. This blog offers a thorough analysis of the implications of TDS and TCS compliances for startups and MSMEs in 2025, the risks they should be aware of, and tactical measures to ensure seamless operations.

Comprehending TDS and TCS: The Foundations of Compliance

The Indian Income Tax Act established TDS and TCS as procedures to guarantee prompt tax collection and reduce tax evasion. TDS refers to the deduction of taxes at the point of payment (such as salaries, rent, or contractor payments), while TCS is the collection of taxes at the point of sale for certain goods or services (such as alcohol, tendu leaves, or motor cars). This means startups and MSMEs must implement robust mechanisms to ensure timely deductions, deposits, and filings.

Relevant sections include:

• Section 194J: TDS on professional fees
• Section 194C: TDS on contractor payments
• Section 206C: TCS on specified goods
• Section 194Q: TDS on purchases of goods exceeding ₹50 lakh annually by buyers with turnover over ₹10 crore
• Section 194-O: TDS on e-commerce operator payments to sellers

Each section has specific rates, thresholds, and compliance timelines, adding to the complexity.

Why TDS/TCS Is a Challenge for Startups and MSMEs

Startups and MSMEs often lack in-house tax expertise and rely on external accountants, who may not always be updated with the latest regulations. TDS/TCS compliance tends to be deprioritized until a notice or penalty is received.

Penalties for non-compliance include:

•  Section 234E: ₹200/day for late filing
• Section 271H: ₹10,000 to ₹1 lakh for incorrect returns
• Section 40(a)(ia): Disallowance of expenses where TDS not deducted
• Section 201: Interest for late deduction or payment

Even inadvertent defaults result in consequences, making it essential for businesses to stay compliant.

2025: Recent Developments Tightening the Screws

In 2025, compliance enforcement has intensified. The Income Tax Department has enhanced digital tracking through Form 26AS and the Annual Information Statement (AIS). Any discrepancy in TDS deductions or reporting reflects immediately in the recipient's tax profile, leading to disputes or refund delays.

The scope of TDS/TCS has expanded. For instance:

• Section 194-O mandates e-commerce platforms (like Amazon or Flipkart) to deduct TDS on seller payments.
• Sections 206AB and 206CCA impose higher TDS/TCS rates for non-filers.
• PAN-Aadhaar linkage is mandatory; non-linking may result in higher TDS.

Startups providing aggregator or financial services must assess if they qualify as "operators"; under these provisions.

Important Compliance Criteria for MSMEs and Startups

Key TDS/TCS responsibilities include:

• Obtaining and quoting TAN in all transactions and filings
• Timely deduction or collection at prescribed rates (e.g., 10% TDS on professional fees
  > ₹30,000; 1%-2% on contractor payments)
• Depositing TDS/TCS by the 7th of the following month or by March 30 for year-end adjustments
• Issuing TDS certificates (Form 16, 16A) to payees
• Filing quarterly returns (Forms 24Q, 26Q, or 27EQ)
• Matching Form 26AS/AIS with internal records to avoid mismatches

Strategic Advice for MSMEs and Startups
To manage TDS/TCS effectively, consider these strategies:

• Invest in automation tools: Use accounting software with built-in TDS/TCS modules
• Train finance staff or partners: Regular updates help keep pace with changing rules
• Set calendar reminders: Prevent missed deadlines with automated compliance alerts
• Consult experts: Especially for international transactions or large-value contracts
• Monitor CBDT updates: Assign someone to track new circulars, especially around the Union Budget

The Repercussions of Non-Compliance: An Important Warning

Non-compliance can be financially and reputationally damaging. Disallowed expenses increase taxable income, and penalties quickly add up. Start-ups may lose investor confidence, as VCs and PEs scrutinize tax compliance during due diligence.

Prospects for the Future: Establishing a Compliance Culture
Compliance is increasingly viewed as a growth enabler. Founders are embedding tax and financial compliance into core strategies to prepare for funding rounds, partnerships, and expansions.

Supportive measures such as:

• Reduced tax rates under Section 115BAB for new manufacturing firms
• Extended deadlines for COVID-hit businesses
• Improved return filing tools are aimed at helping MSMEs and start-ups navigate the compliance landscape.

Conclusion

TDS and TCS compliances are now essential to the financial stability and reputation of Indian start-ups and MSMEs; they are no longer optional side projects. Small firms may confidently negotiate the regulatory maze by being aware of the rules, making the appropriate investments, and taking a proactive stance. Establishing a culture of prompt, transparent, and comprehensive compliance is the best course of action as the government increases enforcement and digital surveillance, setting up the business for long-term, sustainable success.

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